Whilst many of us dream of owning our own home, in the current economic climate, that dream can seem somewhat out of reach. But there is help available...
The Government has set up several different Help to Buy schemes that are designed to help potential buyers who are struggling to save for the initial deposit on their first home. Under these schemes, first-time buyers, including contractors, can buy a property with just a 5% deposit. Without these schemes, you'd tend to need a deposit of 10% or above to get approved for a good deal.
To help you better understand your options, we've teamed up with the experts over at CMME, one of the UK's leading free online mortgage brokers. They've shared their overview of the different Help to Buy schemes, from shared ownership to equity loans, to help you decide if they're right for you:
The Shared Ownership scheme can help you to get onto the property ladder by allowing you to purchase part of a house and then pay rent on the percentage you don't own at a reduced rate. Your local housing association will own the other bit of the property so you'll pay the rent to them.
Under the scheme, you can usually purchase between 25 – 75% of a property. You then have the option to buy more of the house in the future, so you can slowly work your way up to owning the full value of the house.
In England, you are eligible to purchase a home through the Shared Ownership scheme if your household earns £80,000 a year or less (£90,000 or less in London). If you are a first-time buyer, you used to own a home but can’t afford to buy one now, or you are a shared owner looking to move, you could be eligible.
It’s worth remembering that, under shared ownership, although you’ll only own a percentage of the property, you’ll still be required to pay all the maintenance costs.
Help to buy ISA
In December 2015, the government launched a Help to Buy ISA designed to help first-time buyers save for a deposit. Under the scheme, the government will boost your savings by 25%, up to a £3,000 cap. So, for every £200 you save, you will receive a government bonus of £50.
You can pay up to £200 into the ISA each month, as well as being able to deposit a lump sum of up to £1200 in the first month. It’s worth noting that the accounts are available to each first-time buyer, rather than each household. So, if you’re planning to buy with your partner, for example, you can each save into a separate ISA.
The Help to Buy ISA is available through a variety of banks, building societies & credit unions and is available for new savers until the 30th November 2019. You will then have until the 1st December 2030 to claim your bonus.
It’s worth noting that the minimum government bonus is £400, so you’ll be expected to have saved at least £1,600 in your ISA before you can claim your bonus. The bonus can’t be used for the deposit due at the exchange of contracts, to pay for solicitor or estate agent fees, or for any other indirect costs involved in the purchasing process. It's only for the deposit on the home you are buying.
Help to Buy equity loan
Under a Help to Buy equity loan, the government loans the property buyer up to 20% of the cost of a new-build home. This means, with a 5% deposit, you will only need a 75% mortgage to secure the property.
Both first-time buyers and existing homeowners looking to move into a new build property can qualify for this scheme. Set to run until 2021, the scheme allows you to invest in a property up to £600,000 on a repayment mortgage. In Wales, it covers properties up to £300,000 and up to £200,000 in Scotland. It is open to first-time buyers and existing homeowners provided the home you buy is your only residence and you are not buying it to let out for investment purposes (known as buy to let).
To be accepted, you must apply through a dedicated Help to Buy Government Agency who will qualify your eligibility before applying for a mortgage. For full details visit the government website. You won’t be charged loan fees on the equity loan for the first five years of owning the property.
However, it’s important to remember that interest only mortgages are not eligible, and you must not own any other property. The Equity Loan scheme also only applies to new build properties.
London Help to Buy
In February 2016, the Government increased the Help to Buy Equity Loan scheme’s upper loan limit from 20% to 40% for buyers in all London boroughs. This was in response to property prices in the capital.
You won’t be charged loan fees on the 40% loan for the first five years of owning the property.
For further information about taking your first steps onto the property ladder, or to find out more about mortgages for contractors, freelancers, and the self-employed, please get in touch – we’re always happy to help.
Ask the expert
We asked Dale Parry, one of CMME’s senior Mortgage experts to explain the pros and cons of Help to Buy schemes and what the alternatives are…
Is a Help to Buy scheme for me?
In simple terms, Help to Buy was designed to help potential home buyers, struggling to raise the required deposit for a mortgage. Typically Help to Buy schemes appeal to first time buyers wanting to get on the property ladder but can also help existing homeowners upscale to their next home.
What are the pros and cons of these schemes?
Help to Buy schemes can enable you to purchase your own home sooner and with potential lower monthly mortgage payments. Plus, with the Equity Loan scheme, you don’t have to make any repayments on the Government loan for the first 5 years. This gives you a little extra financial flexibility as you settle into your new home.
On the downside, the restrictions around the type of property - newbuilds only – and the fact you can only own one property to qualify could be limiting for some. Plus, property developers and mortgage lenders alike are not obliged to participate in the scheme so it’s worth doing your homework before embarking on your property search.
Lastly, with the Equity Loan scheme, it’s important to note that if the property rises in value, so too will the 20% equity loan. The main thing you need to understand about this is that it means your repayments will go up. Plus, if you decide to sell within the first 5 years, you will normally be required to pay back the government loan in full.
So, what are the alternatives?
The good news is that as the mortgage market has continued to recover from the ‘credit crunch’ and consumer confidence has grown, traditional mortgage lenders are re-evaluating their stance in the market. New lenders have also emerged and in the last 12 months, we have seen an increased appetite for lending.
This has led to the re-emergence of 95% mortgages, which may provide a credible alternative to the Help to Buy schemes.
How do 95% mortgages compare to Help to Buy schemes?
With both options, the buyer is only required to put up a small deposit – 5% of the property's value. However, with a 95% mortgage, there is no government involvement, no Help to Buy application forms to complete and you are not tied to a loan that may be increasing with property value.
On the flipside, 95% Mortgage rates will usually be less competitive than those through Help to Buy. But you will likely have greater lender choice with a 95% mortgage, meaning you will be able to shop around for the best deal.
Plus, you may be able to reduce your monthly mortgage payments in the early years as more and more lenders are offering longer mortgage terms - up to age 75 in some cases - subject to anticipated retirement age. However, making smaller monthly payments over a longer period of time does mean you'll end up paying a lot more in interest overall.
Ultimately though, the choice is a personal one based on your own circumstances and so it’s well worth doing your own research or speaking to a mortgage broker.